November 07, 2007

K-4

Kansas Department of Revenue has released a new Kansas version of a W-4, the K-4. The goal is to reduce the number of taxpayers who have Federal refunds but owe Kansas. The new form will be required after the first of the year for all new hires. Prior employees can chose to fill out the new form. The big difference is in the personal allowance worksheet attached to the withholding form. It doesn't have a line for dependents who would quality for the Child Tax Credit.

Why the change? The obvious answer is that Kansas does not give the Child Tax
Credit. Let's say we have two married couple. Each has the same income
($65,000) and 2 dependents and both follow the W-2 worksheet to figure
their correct exemptions. However, Couple A's dependents qualify for
the Child Tax Credit (CTC). So that couple's W-4 will show 2 more
exemptions that Couple B's who don't qualify for CTC. With more
exemptions, Couple A will have less taken out of their paychecks than
Couple B. On the Federal return, this should not be a problem because Couple A qualifies for CTC. Both couples should come out at about the break
even point. Their Kansas return will be a different story. Couple B
should again come close to break even. But Couple A will have a balance
due. The new K-4 should solve that problem.But most of my "refund on Federal but owe Kansas" clients don't get CTC. The problem is how the employer is withholding. I haven't done all the research on this, but I think the problem is employers who base the Kansas withholding on the Federal Taxable Income. For years, I have been seeing clients who are getting a good refund on their Federal return owe Kansas. Not suddenly, but each year the Kansas refund goes down or the balance due increases while the Federal refund stays about the same. For example, a married couple with 3 children in college would get a 2006 refund from withholding (no credits) of $2100. But they owe Kansas $100. This seems to happen more to clients who work for national companies like GE and Rubbermaid. Companies who have employees in several states. That is why I am leaning to the employers using Federal Taxable Income not Kansas Taxable Income. This would not be a problem in many of the states I have prepared because they use the Federal Taxable or adjust their exemptions and deductions every year. Kansas exemptions and deductions are not tied the the Federal directly. Occasionally, lawmakers will bring Kansas up to the Federal level, but the statute is not written to increase with the Federal. So, Kansas falls behind again. This can result in large differences in Taxable Income. In the example mentioned above, the difference in Taxable Income was $11,000 in 2006.Kansas has made an attempt to solve a problem of under withholding with the new K-4. I think the bigger help will be their intention to require the new K-4 for taxpayers who constantly owe Kansas. Getting the employees to change their withholding is an easier task than getting the employers to fix their systems.

Disclaimer

Disclaimer

A reader should seek advice from an independent tax adviser with respect to the information on this blog based on the reader’s particular circumstances. This advice is intended to be general information and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed here.